Accounting Standards refer to the authoritative guidelines that enable the recognition, measurement, presentation, and disclosure of financial transactions in an organisation. The standards ensure uniformity, transparency, and consistency in financial reporting, providing a conceptual framework to prepare financial statements. The Accounting Standard enhances comparability and reliability, as it ensures a unified manner of accounting across industries and entities, enabling investors, creditors, regulators, management, and other stakeholders to make effective decisions based on the financial data presented.
AS 21 – Scope and Objectives
AS 21, commonly referred to as “Consolidated Financial Statements,” is the accounting standard under Indian GAAP that lays down the principles and procedures for preparing CFS statements by a parent enterprise in relation to its subsidiaries. The standard holds that the group’s financial information should be presented as if it were one single economic entity instead of being different legal entities. It guarantees that relevant stakeholders get a clear and transparent view of the overall group’s financial performance and position.
Scope of AS 21
AS 21 applies when a parent company has control over one or more subsidiaries. The scope encompasses:
Entities covered
- Parent companies may have subsidiaries, either directly or indirectly.
- Parental control within groups includes more than 50% voting power, control over board composition, and other controlling rights.
Circumstances included
- Consolidation of all subsidiaries, both domestic and international.
- Consolidation is necessary even when the parent company itself is controlled by another entity, unless exempt
Scope Exceptions
- Subsidiaries that are acquired with the intention of resale in the short run.
- Those subsidiaries that have long-term restrictions limiting control.
- Joint ventures and associates fall under AS 27 and AS 23, respectively.
The standard primarily addresses the parent-subsidiary relationship and does not relate to proportionate consolidation or equity method accounting.
Objectives of AS 21
- Give a True Picture of the Group: To present the financial results and financial position of the parent and its subsidiaries as one economic unit.
- Ensure Transparency: To eliminate the misleading implications of separate entity reporting and to present a comprehensive, accurate, and comparable perspective.
- Improve User Decision-Making: The purpose is to provide investors, lenders, regulators, and analysts with reliable information at the group level that will enable them to make better decisions.
- Standardise Consolidation Procedures:
To set clear guidelines on treatment regarding:
- Inter-company transactions, Goodwill/capital reserve,
- Minority interest,
- Uniform accounting policies.
AS 21 Consolidated Financial Statements
AS 21 relates to the preparation and presentation of Consolidated Financial Statements for a group of companies controlled by a parent company. The standard aims to present a true and fair view of the financial position and performance of the parent and its subsidiaries as one economic unit and provides principles for consolidating subsidiaries’ financial statements by the parent company.
The purpose of AS 21 is to
- present the financial data of a parent and its subsidiaries in a consolidated format, as if the group, in its totality, works as one whole
- envisages consolidated financial statements to present comprehensive information regarding the group’s financial status, profitability, liquidity, and net worth.
- Lay down standards for governance, consolidation, accounting for minority interest, and consistent accounting policy at the group level.
- Enhance consistency in reporting and minimise the possibilities of manipulation due to different reporting at the subsidiary level.
AS 21 applies to any parent company that prepares consolidated financial statements. It includes enterprises having one or more subsidiaries where the parent has direct or indirect control. This standard does not extend to joint ventures which come under the provisions of AS 27. Associates are covered by AS 23. It also applies to those entities that experience temporary or severe long-term restrictions.
The standard became imperative for companies that met specific criteria relating either to turnover, listing status, or borrowing limits.
Meaning of Control
The underlying principle behind AS 21 is the concept of control. A parent is usually considered to be in control when:
- it possesses more than 50% of the voting rights of a subsidiary, or
- it controls the composition of the Board of Directors or other governing body, or
- has the power to exercise significant influence over operational and financial policies either through statute or agreement.
Control can be established even without majority ownership—such as through agreements, special rights, or proxies.
Definition of Key Terms
- Parent – An organization having one or more subsidiaries.
- Subsidiary – Organization that is supervised by another organization.
- Group – A parent organization along with its subsidiaries.
- Consolidated Financial Statements (CFS) – Financial statements that combine the assets, liabilities, equity, revenues, expenses, and cash flows of a parent company and its subsidiaries as if they were one economic entity.
- Minority Interest – That portion of the net assets and income of a subsidiary that cannot be attributed to its parent. It reflects the interest of shareholders other than the parent.
When Consolidation Is Necessary?
When a parent company gains control over another entity, it becomes obliged to prepare consolidated financial statements. Consolidation is required, even if the parent is a subsidiary of another corporation, provided it is not legally exempt.
Exceptions include temporary control, for instance, when a corporation is acquired with a view to resale, and significant limitations impeding control.
Consolidation Procedures Under AS 21
The following procedures are necessary for correctly presenting consolidated financial statements:
1. Combine Like Items
- Consolidation involves adding together items on a line-by-line basis for the parent and subsidiary’s assets, liabilities, revenues, and expenses.
- The intercompany balances and transactions should be reconciled.
2. Eliminate intercompany transactions
All intra-group transactions must be completely eliminated, including:
- Intercompany sales
- Loans and advances
- Debtor/creditor balances
- Unrealised profits on inventory transfers
- Dividends declared by subsidiaries to the parent
This ensures no double-counting occurs and depicts the group as one entity only.
3. Calculation of Goodwill or Capital Reserve
At the time of acquisition:
- If the parent pays more than its share of net assets → Goodwill arises.
- If the parent pays less → Capital Reserve is booked.
Goodwill represents strategic benefits and synergies anticipated to emerge from the acquisition.
4. Calculation of Minority Interest
- Minority interest appears under Equity in the consolidated balance sheet.
- It includes the minority’s share of net assets and profits/losses of subsidiaries.
- The minority share of profit is presented separately in the CFS Profit & Loss Statement.
5. Uniform Accounting Policies
- Consolidation requires consistency in accounting policies for all group enterprises.
- If a subsidiary uses different policies, these need to be adjusted before consolidation.
- This ensures comparability and avoids distorted reporting.
6. Reporting Dates
- The financial statements of the parent and subsidiaries must be prepared for the same reporting date.
- Where this is not possible, subsidiaries’ statements not more than six months old may be used, with material adjustments.
Exclusions from Consolidation
- It can be excluded if the subsidiary is acquired with a view to resale in the near future.
- Long-term restrictions may hamper the parent company’s ability to exercise control over the financial and operating policies of the subsidiary.
- The parent company may also be subject to legal or political constraints in exercising control over the subsidiary.
Disclosure Requirements Under AS 21
AS 21 requires that certain disclosures be made to ensure that CFS presents information which is clear, transparent, and complete about the state of affairs and financial performance of the group. The main disclosures required are:
- List of Subsidiaries: The name, country of incorporation, and principal activities of each subsidiary shall be stated. The parent company should also indicate the percentage of ownership and voting rights held.
- Basis of Control: The method of control over each subsidiary must be disclosed, whether by majority shareholding, composition of the board, or otherwise.
- Subsidiaries not included in consolidation: In case of exclusion of a subsidiary, the parent should indicate the name and reasons for not consolidating, such as temporary control or long-term restrictions. Besides, the effect of this exclusion on the CFS should be disclosed.
- Changes in Group Structure: Acquisitions, disposals, and changes in ownership that happened during the reporting period must be disclosed along with their effects on the consolidated financial statements.
- Minority Interest: Amounts of minority interest in subsidiaries’ net assets and profit or loss have to be separately disclosed in the CFS.
- Accounting Policies Used: Accounting policies followed in the preparation of the CFS must be disclosed. If the subsidiary follows different accounting policies, any adjustments made to uniform these policies must also be disclosed.
- Goodwill or Capital Reserve: The goodwill or capital reserve on consolidation should be represented clearly and explained in the financial statements.
- Reporting Dates: If the reporting dates of financial statements used for consolidation of subsidiaries are different, the parent shall disclose: The subsidiary’s reporting date, and Reasons for using statements not aligned with the parent’s reporting date.
- Restrictions on Fund Transfers: Disclosure of any significant legal, regulatory, or contractual restrictions that constrain a subsidiary’s ability to transfer funds (dividends, cash, or other assets) to the parent.
Conclusion
AS 21 is an important accounting standard that lays out the method of consolidating financial statements that a parent company has to perform. By requiring that financial information be presented as if from one economic entity, it ensures clarity, eliminates distortions from separate reporting, and enhances the reliability of financial data. Consolidation under AS 21 rests on a bedrock of principles based on control, uniform accounting policies, elimination of intercompany transactions, and recognition of minority interest.
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